Discuss about the Financial Accounting and Reporting Comprises.
The modern world comprises of various organizations functioning in the different areas of operation. Every firm working in their different sectors try to maximize their profit by generating new market and by introducing innovative techniques to increase their competitive edge. In order to raise the competitive edge in the market, every organization is in need of capital and a good management structure so that all the departments in the organization can work effectively. The introduction of capital and management supervision is only possible with the help of entrepreneurs. It is seen that there are various organizations, which are managed two or more owners. They function in the business by sharing the profit among themselves and even introduce new capital in the firm and take important business decisions.
The current paper tries to understand the various partnership processes that are undertaken in a business and the different types of partners that are seen in the business. The paper even analyzes the various features they undertake and how they function in the organization.
Partnership refers to a meeting where parties also known as partners come into an agreement to collaborate to provide their common interests. The partners in this case are common individuals and the business may function together with the help of the partners to raise the likelihood of every one accomplishing their goal to expand their reach. A partnership may lead to the issue and holding of equity and can even be an agreement bounded by a contract. In this study, the partnership is being conducted among a group of students who have started a business on their major area of study.
According to the question, it is essential to determine the senior partners in a partnership business established in a group. There are various ways to determine the senior partners of a business. In case of a law firm, senior partners are generally the experienced and the senior members who create the revenue of the firm. The style of equity partnership depends from firm to firm. There are many businesses that have a two-storey structure of partnership where certain partners are placed as non-equity partners or salaried partners. They are the title of partner but are eligible to receive profit from the firm (Yeneabat and Butterfield 2012). The senior partners are generally given the position of the equity partners as they have the ability to increase business.
In general cases of partnership business, there exists many complicated and complex business structure, which leads to the creation of classes in partners who have different voting and rights related to finance. The partners establish senior and junior partners and appoint a managing partner who is designated with various different responsibilities. The senior partners are generally those partners who have competent knowledge about the business and even have years of experience. The senior partners are even selected on the basis of amount of capital they bring into the business (Schreurs 2013). The amount of capital contribution determines the interest of the partner towards the business and it is even seen that the major contributors in the business have a special reputation in the eyes of the other partner. The seniority of a partner is even determined by looking at the experience one holds with regard to the functioning of the business. there are even individuals who do not contribute a lot of capital but have a lot of knowledge about the business through their experience and contribute their physical and mental labor to raise the business to a reputed position in the market.
The other mode of determining a senior partner is on the basis of the responsibilities levied upon them. In a partnership business, it is seen that different responsibilities are designated to the partners like the giving the post of managing partner who is in charge of supervising the meetings between the partners and delegating the authorities to their subordinates. The other discharge of responsibility involves the appointment of a Management Committee in which a parent is positioned at the top as the Chairman (Ingulstad, 2012).
Another way of determining the seniority of a partner is by dividing the partners into salaried and equity partners. The salaried partners are generally the dormant partners who do not contribute much in the business or hold an honorary position in the firm. They are not treated as the senior partners and have no say in the decision-making in the business. They have the right to vote during the meetings or while appointment of a new partner. The salaried partners do not have the right to get the share from the profit. The equity partners are considered the senior partners as they contribute in the business through investment and through expansion of the business (Bee 2012). They are entitled for a share in the profit of the organization and generally initiate business decisions.
During the creation of a partnership, the parties have the choice of establishing an agreement of partnership. If there is no partnership agreement, the revenues of the firm will be shared equally. The other process in case of absence of a partnership agreement is dividing the profits in any way they deem correct. During the establishment of the ratio the partners can consider any reasons for the profit-sharing ratio (Andrade and Rhodes 2012). The main factors involve the capital contributions, responsibility and combination of different factors.
Responsibility: The partners can think of dividing the profits according to the responsibility undertaken by each partner. The level of responsibility a partner undertakes is known to the other factors as they are decided during the formation of the partnership.
Capital Contribution: During the establishment of the partnership the partners can invest the least capital to the partnership business according to their business. It is seen that there are a few partners that contribute more to the business. If this is the condition, then the partners may feel like sharing profits based on the amount of contribution they make.
Combination of Factors: The profit sharing ratio can be a whimsical figure that the partners may agree. This refers to the fact that the partners can look over the other main factors and come to a negotiation about the profit-sharing ratio, which is beneficial for everyone. As long as the conditions are agreed upon in the partnership agreement that is how the parties will be able to divide the revenue.
There is another possibility that before entering the partnership, a written agreement can be established to cover all the grounds. A profit sharing contract generally shows the ratios that will be used to divide the profit and the losses (Thomas et al. 2014). The ratios may be determined by the capital invested by the partner in the organization or through any contract that only segregates the profits and losses equally.
Capital contribution has an adverse effect on profit sharing. The ratio is an whimsical figure that the partners agree on. The level of ratio is determined by the on the amount of contributions made by the partner. In this case, the partners may decide to divide the profit according to the contributions they have made in the business. it can also be the case that the profits can shared evenly and the partner who has contributed more is provided with an interest by the other partners over the extra amount contributed by him from the others.
The ratio of profit sharing might not be equal in spite of the fact that all the partners have invested capital equally. Therefore, to remunerate the contributions of the extra capital, an interest is paid to them on the excess amount they have contributed (Fisher and Neill 2014). For instance, A and B started a business with equal capital therefore they shared profit equally and in future when the business needed capital it is seen that A contributed more than B. therefore, instead of altering the agreement, B paid an interest to Aon the extra capital given by A.
Therefore, it is seen that an interest can be paid to a partner who has invested more than the others in the near future for better functioning of the business. This process not only elevates the business process but even compensates the partner for his extra contribution. The effect of interest even reduces the burden of changing of the partnership agreement as it requires an extensive process and cost.
It is seen that there are circumstances in a partnership agreement where salary can be paid to the partners on account of their services to the business. The amount of capital investment also reflects the contribution of the partners. It is also seen that other factors like ability of the partners to expand and the business and bring in new market and customers are even an important factor. The partners even through their expertise establish new and improved management process and manufacturing process, which increases the competitive edge and market share in the economy. The expertise is even helpful in making quick decisions in times of emergency in the market when there are drastic changes in the strategic plans by the competitive firms. The experience of the partners also comes in handy as they can predict any changes that might occur in the near future (Chan 2012). It helps the business to changes in their business plan accordingly to safeguard their interests and maintain a steady profit for the organization. Therefore, it is seen that along with capital contribution the internal abilities of the partners play an important role in the efficient functioning of the business.
The experience and the ability of a partner even induces the other partners to pay them a salary so that they get encouraged to focus more on expanding the business by bringing in new potential customers and sales within the organization. Thus, it is of consideration to pay off the partners with a salary along with a part of the profit as remuneration.
The salary of the partners varies from person to person because the salary is fixed with respect to the work they contribute to the business. The partner who contributes the most through capital investment and with their expertise and experience receives the highest salary followed by others according to their contribution (Sriraman 2013). It is even seen that a partner contributes to the business through all the aspects but receives less salary than another partner who does not contribute through salary but contributes through their experience and expertise. This is due to the fact that even when a person provides its expertise and capital contribution to the firm all the partners considers who has provided more to the business the organization (Felbermayr et al. 2013). For instance partner A contributes to the business by investing $ 15,000 to the business along with using his experience to establish a strategic plan to counter the changing demand in the market in the near future. For his service, he receives a salary of $ 5000. On the other hand, partner B does not contribute any capital to the business but through his expertise and experience brings in sponsors to the business who invests capital. The partner even through his experience brings in new business to the organization thereby increasing the profit and market share of the firm. Thus, it is seen that impact of these factors play a crucial factor on the salary of the partners (House 2012).
It is even seen that salary acts as an encouragement to those partners who do not contribute greatly to the business. The remuneration of salary encourages the dormant partners to participate in the functions of the business thereby increasing the sales and profit for the organization.
The other factors that need to be introduced in a partnership agreement are as follows:
Management and Voting: The contract of partnership is manageable through a partner who is appointed as managing partner or through majority voting by the existing partners. The voting process can be undertaken through the below discussed method:
Proportional to Contributions: The power of the voting depends upon the capital contribution of each partner (Burkholder 2014).
Proportional to profit share: The power of voting is designated according to the distribution of profits
Equal Vote: the power of voting is equal for all the partners and every partner hs the right to vote only once.
Partnership Withdrawal: This process can be undertaken if the partnership contact allows withdrawal. In this case, a partner may make a peaceful exit as long as he or she is respecting the notice period, period of probation and the other terms mentioned in the agreement (Sharafanova and Fedosenko 2013). The two types of partnership withdrawal are as follows:
Voluntary: This process takes place when a general partner takes the decision to exit the business for any personal reason like retirement.
Non-voluntary: This process takes place when a partner has to exit the business without his own consent like death or impeachment.
Partnership Dissolution: During the event of dissolution, the partners may show the how the assets are divided among them. The various ways a partnership may be dissolved are as follows:
Term of the partnership: A partnership can be everlasting or can have a stipulated length of term.
Purpose of the partnership: The reason for the engagement of the partnership needs to be mentioned and what activities will the partnership serve and how will new additions be added to the business needs mentioning (Blackler et al. 2012).
Admission of new partners: The procedure of the admission of a new partner needs to be mentioned along with the reason of admission needs special mention. The initial contribution of the new partner along the future contributions needs to be mentioned thereby avoiding the chances of any dispute in the future (Urban 2013).
Maintenance of record: The place where the records and documents with respect to the partnership is being kept is to be disclosed in the agreement.
Sale or transfer of the interest’s of a partner: The sale or transfer of the power to someone else due to retirement or other events is an important factor that requires mentioning. This includes the buy sell agreements for the partners (Aucock 2014). The condition of the partnership continuation even after a partner dies or leaves has to be mentioned.
Non-competition clause: This clause restrains a partner from leaving the partnership from competing with the partnership’s business, within a defined area and time period (George 2012).
Non-disclosure clause and non-solicitation clause: These clauses restrain partners and former partners from disclosing proprietary of the business, or from soliciting employees or customers away from the partnership (Selby 2012).
Conclusion
The above study underlines the various aspects the partners bring in to the business and reveal how they are remunerated and even highlights the various contracts that are seen in a partnership agreement. The paper is even helpful in understanding the role of various partners in a business and the process of payment according to their contribution in the business. The partners are the heart of an organization and therefore it is important that they have a good understanding of the business and aim at expanding the business from its current position.
Reference List
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